Tough choices on the road to a lower-carbon world

Jan 8, 2016

Ben van Beurden, Shell’s Chief Executive Officer, is guiding the company through a difficult period for the industry. At the end of 2015 – his second year in the role – he reflected on oil prices, the proposed BG combination, Alaska, and the role Shell can play in the transition to a cleaner energy future.

The Appomattox deep-water project will feature Shell’s eighth and largest floating production platform in the Gulf of Mexico

It has been a tough year for the oil and gas industry, with prices around half the levels seen in early 2014. What have been the high and low points for you?

There were several highpoints. An important milestone for our Upstream business was deciding to go ahead with the Appomattox deep-water project in the Gulf of Mexico. It makes strong business sense, even in a low oil price environment, because we have worked hard to make it very cost-competitive.

We also started production from the third phase of our Bonga deep-water project off the coast of Nigeria, adding valuable production to this major facility.

We also took final investment decisions to build a major unit at our Pernis refinery in the Netherlands and expand our Geismar chemical plant in the USA.

But if I had to pick out one highpoint it would be the recommended combination with BG. The BG deal is on-track for completion in early 2016. The recommended combination is expected to enhance our cash flow, create a leader in liquefied natural gas (LNG) and deep water among international oil companies, and help make us more focused and profitable.

The lows were that we suffered several fatalities during the year. There was also a fire at one of our facilities in Singapore that left several people seriously injured. Incidents such as these are the low points of any year, and show that we must stay vigilant. Nothing is more important than safety.

"If I had to pick out one highpoint it would be the recommended combination with BG."

The proposed BG combination is one of the biggest ever energy industry deals. But Shell’s share price has underperformed the sector since it was announced. Why do you think that is?

Our share price has largely moved with the rest of the oil and gas sector. Our industry is struggling in the eyes of investors, largely because of the sharp fall in oil prices. International oil companies have all seen their share prices fall.

You could say that Shell’s share price has fallen a bit further.

Many companies have taken dramatic measures, with announcements of big cost cuts and job losses. We too are taking many steps, including cutting capital spending, reducing operating costs, and even halting projects that have become uncompetitive and unaffordable.

Our response has been measured, but we will continue to be tough.

Has your ongoing push to make Shell more competitive helped the company during this period?

It has been a difficult year. But our financial strength before the downturn has helped us through the rough market conditions over the last year.

Our main focus has been to live within our means during this period of low energy prices.

In 2015, we reduced combined operational costs and capital spending by $11 billion, compared to 2014.

Being highly competitive is even more important in the current environment. We have worked very hard to reduce our costs to make our operations more competitive. In some cases we had to decide to exit positions in order to keep investing in areas where we are better placed.

So it’s not just about cutting spending, it’s about investing wisely. It’s all about getting the most competitive portfolio possible.

“It’s not just about cutting spending, it’s about investing wisely. It’s all about getting the most competitive portfolio possible.”

Haveyou changed your view during 2015 of how energy prices may evolve in the longer term?

No. I still believe that population growth, rising standards of living, and meeting the basic needs of growing urban populations will drive demand over the long term. At the same time, supplies of oil and gas from resources that the world relies on today will shrink. So the world will need large and continuous investment in new oil and gas developments simply to keep up with demand.

The investment case for oil and gas will remain strong, despite all the renewable energy growth and energy efficiency improvements that are also needed.

After all the expectation, not finding enough oil to justify further exploration off the coast of Alaska was perhaps one of the industry’s biggest surprises of the year. How hard was it to make the decision to give up on Alaska after seven years and billions of dollars of investment?

It was a real disappointment. We had hoped and expected to find quite a lot of oil. But I had always made it clear that if there wasn’t a big enough discovery we would cease operations swiftly and safely. It turned out that there was almost no oil. It was very conclusive, so I had no difficulty in making up my mind.

In the long run, I think the world economy is going to need Arctic oil. Already, a lot of the oil and gas used around the world today comes from the Arctic and I think it will continue to play a key role. But we have basically walked away from Alaska and I do not see us going back any time soon.

What do you find the toughest part of running a big energy company?

The hardest thing is to be recognised as a valuable partner in the discussion on how to combat climate change while ensuring that people have access to the energy they need.

It seems at times that those people who understand the energy system best have little or no credibility, in the eyes of the public, when talking about how the transition to a low-carbon society can realistically be achieved. Ironically, film stars and other celebrities seem to have total credibility when talking about it.

It appears to come from the belief that there are two groups of people – those with good intentions for the planet and people with bad intentions – and guess where Shell gets placed? I object to that notion, because we really do have the same good intentions. I also want the best for the planet and its people.

Sadly, the result is that there is a now a mistaken belief among some people that climate change can be solved in a very simple way.

Those who understand the energy system know it can’t. It will take a tremendous amount of effort, determination and complex measures to get right.

The problem is that we as an industry have also lost a lot of credibility in this space, in the eyes of the public. So bringing that credibility back to us as a company, to be seen as a valuable part of the solution and one with a vital contribution to make, I find that the most difficult thing.

Is that why you and nine other industry leaders called jointly for the UN climate summit in Paris to reach an effective agreement to reduce carbon dioxide emissions?

Yes. Society needs to get beyond just agreeing emissions reduction targets. Agreeing targets may satisfy some people, but you don’t actually achieve anything with them.

There need to be strong policies that are really going to drive behaviour towards those targets. One of the key measures needed is for governments to put an effective price on carbon emissions, so that both industry and consumers are incentivised to either invest in lower-carbon technologies or change the way they use energy.

So what do you think the right path to a sustainable future looks like?

First of all, we need to reduce the energy intensity of the economy, with more efficiency and better products to help achieve that. There is no doubt that we also need more renewable energy. In fact, we will need as much possible.

But you cannot simply wish fossil fuels away. They will still be needed for some time to come. So we need to make these vital sources of energy for billions of people around the world as low-carbon as possible, for example by developing better technologies and ways to capture the carbon produced.

“You cannot simply wish fossil fuels away. They will still be needed for some time to come.”

An injection well at the Quest CCS facility, which will capture and store roughly the same CO2 emissions every year as produced by 250,000 cars

The International Energy Agency says that carbon capture and storage (CCS) technology could account for one-sixth of required emissions reductions by 2050. But CCS is proving slow to develop.Will it ever achieve its potential?

Shell also sees CCS as a crucial part of the solution to climate change.

We opened a major CCS facility, Quest, in Canada in November. It is designed to safely store more than 1 million tonnes of carbon dioxide (CO2) a year.

We are sharing Quest's design and processes to help others use such technology to cut carbon emissions from industrial facilities around the world. But, like most low-carbon technologies, it needs strong and reliable political support to fulfil its potential.

That is why it was such a huge disappointment when in November the UK government cancelled its plan to help fund a major CCS development. Our Peterhead project in Scotland would have been the world’s first CCS facility fitted to an existing gas-fired power plant. It was one of the final contenders in a competition which would have placed Britain at the forefront of this vital technology.

CCS could cut emissions from gas-fired power plants by up to 90% and would be a lower-cost way to reduce carbon emissions than offshore wind, for example.

But the high cost of developing such innovative projects needs reliable political support. That is why strong governmental policies that attach a cost to carbon emissions are urgently needed globally. Effective carbon pricing mechanisms give all industries a strong incentive to reduce their emissions significantly.

Everyone wants an effective solution to climate change. If you want to put money into something that can make a big difference in the energy and climate-change challenge you had better put it into something that has the biggest bang for the buck.

How else could Shell help in the transition to a more sustainable future?

We could develop new fuels, for example biofuels, which are often overlooked but are also renewable. We are already a large producer of low-carbon biofuel. We are also developing hydrogen as a fuel, which can also be produced in a renewable way.

I think we could also play a really important role in making the use of renewable energy more effective by bundling it up with more conventional lower-carbon energy sources like gas. There is great potential for large-scale integrated solar and gas developments that produce far less carbon while ensuring reliable supplies of electricity.

On a personal note, you have to travel almost continually in your role as leader of one of the world's biggest companies. How do you find time for family?

I try to avoid business travel at weekends. And, when I’m at home, I make the most of the precious time I have with my family. Sometimes it’s impossible, because I inevitably have to work a bit at weekends. But when I do, I get up early and make sure I do it before they wake up.

You have to make sure you focus on reserving time and effort for your family; otherwise it will all be swallowed up by work. It is not an easy balance to strike, but thankfully I have a wife who helps me to get that balance right.